Will a Take Over Mortgage Technique Work for You?

In times when the economy is experiencing high interest rates, it can be well worth it to use a take over mortgage technique in order to purchase residential and investment property. As most consumers aware, the bulk of their mortgage payment is derived directly from the interest rate. Over a period of twenty or thirty years, a high mortgage interest rate can amount to a substantial sum of money. When interest rates are high consumers and investors may feel they have no choice but to take on the interest rate and hope that rates eventually lower and they can refinance their mortgage. In the meanwhile, millions of investors and homeowners continue to lose money month after month because of high interest mortgage payments. A take over mortgage technique, also known as an assumable mortgage, allows a buyer to actually take over the mortgage of the previous homeowner. In the best case scenario, this means that the new owner will also be able to take advantage of better terms, including a lower mortgage interest rate.

This certainly sounds like a dream come true, but in order for this mortgage technique to work effectively there are a few things to watch out for and some stipulations that must be met.

Obviously, the number one reason why an investor or other home buyer would want to take over a mortgage is in order to access a lower interest rate than what is currently offered in the prime interest rate market. Therefore, you would only want to consider assuming a loan if the interest rate on the seller’s existing mortgage is lower than the current prime interest rate.

It is important to realize that not every mortgage loan is available for assumption. The first mortgage terms must contain no due on sale clause. A due on sale clause means that the entire payoff of the first mortgage loan would be due when the current owner sells the property. In essence, this would prevent the mortgage loan from being assumed by anyone else.

Another important point to look for is whether or not the lender will automatically increase the existing low interest rate to the current prime market interest rate after the mortgage take over is final. This is standard policy with some mortgage lenders, however not all.

Besides these two factors, the assumability of a loan is also affected by the date that the mortgage loan was originally closed. Back in the wonderful heyday of real estate any kind of mortgage loan could be assumed at any time. Rules have changed, however and now there are specific rules regarding the take over of FHA and VA loans.

FHA mortgage loans that were made prior to December 1, 1986 are fully assumable. There are no restrictions are buyer qualifications on these mortgage loans. FHA loans that were closed between December 1, 1986 and December 14, 1989 however; are only assumable if the buyer meets specific qualification criteria. Unless a liability release is signed the seller will remain liable for the mortgage loan should the new buyer default. Buyers who want to take over an FHA loan that was closed after December 14, 1989 may only do so if they meet specific qualification criteria and have satisfactory credit scores.

VA loans also have similar requirements in regards to origination dates of the first mortgage loan. A non-veteran may be able to take over a VA loan that closed after March 1, 1988; but they will need to obtain approval from the VA or the lender.

While going through the motions of assuming a mortgage loan can be a bit complex, when interest rates are steadily increasing and threaten a buyer’s ability to afford a mortgage property, the reward of a low interest rate is well worth the effort.